Lebanon

Acres Development – Georges Kamal (Q&A)

by Executive Staff
written by Executive Staff

Georges Kamal is the CEO of Acres Development, a subsidiary of the retail company Azadea. Earlier this year, Acres launched its first property — Le Mall Sin el Fil — and they currently have plans to launch two more: Le Mall Saida (at the end of the year), and Le Mall Dbayeh (at the end of 2010). Executive sat down with Mr. Kamal recently to talk about the branding of Le Mall, and why, despite the economic crisis, he believes this is a good time to launch shopping malls in Lebanon.

E  Tell me about the new Le Mall at Habtoor City.
Don’t say Habtoor, please.

E  Ah, I see. So Le Mall is in the location of the old Habtoor Le Boulevard Mall, at the Habtoor Grand Hotel, in Sin el Fil, but it’s an entirely new mall?
Right. The idea was to re-launch this mall. The original building was achieved in 2005, by Habtoor. It’s part of their hotel. But they didn’t succeed.

E  Why not?
You can attribute it to the circumstances in Lebanon, the political uncertainty which Lebanon was suffering for a couple of years, because of the [former Prime Minister Rafiq] Hariri assassination.

E  And your company, Acres Development, took over this failed mall and re-launched it as Le Mall. Why?
The commercial deal was fantastic. Because when there is a failure somewhere, the owner tells you, “Please take it and make something successful out of it,” and the conditions were extremely pleasant and profitable for us. We leased it from Habtoor for 20 years.
Also we believed a lot in the area, Sin el Fil.

E  That’s pretty brave, launching three malls in the middle of an economic crisis. You must be pretty confident.
This is important, because it’s directly related to our strategy. What we are testing today, are seeing today, is that Lebanon is crossing the crisis without any loss, any harm. Why? We think that in the previous three to four years Lebanon didn’t pick up as much as the other countries abroad picked up, it didn’t profit from the growth in the region because of the political situation here. That’s why today, you don’t feel like you’re going down, because you didn’t go up. The moral of this is that Lebanon is still attractive to the Arabs in the region and to Lebanese living abroad. We’re always trying to monitor, month by month, what’s happening in Lebanon, and we are always surprised in a positive way. So we are extremely confident in this country.
We’re seeing right now an increase in our sales by 20 percent.

E  Why do you think that is, other than the relative stability of Lebanon lately?
What we’ve done to Le Mall is a series of actions. First, the architecture and the design of the old building was extremely heavily, a lot of concrete, not a lot of light, not a lot of style. What we’ve done is to make it lighter, a modern style, catchy. We changed 50-60% of the structure.
Our second action was to build a very strong mix of brands inside. Because what brings people to Le Mall, or any mall, is really the brands there. Azadaya, the mother company of Acres, has in its portfolio a lot of big brands: Zara, Massimo Dutti, Paul and Bear, a lot of these brands. And we completed the Azadaya brands with some from the other big groups, like Retail Group [La Senza, La Cenza Girl, Aldo, Nine West] and Bestseller [Vero Moda, Jace & Jones.]
And in order to complement the shopping area with some food and beverage, we brought with us the leaders in the Lebanese market — Roadster, Lina’s, Dunkin’ Donuts, Burger King, Columbus Café, Julia’s.

E  Finally, there is the communication, the campaign.
The famous IAmMyself.Me campaign. You could hardly leave your house without seeing that.
That was the idea — it was a crazy idea to promote something very solid in Gemmayze, but today it is the talk of the town. What you try to do is build Le Mall as a brand. We went in a very aggressive campaign, very catchy one, and very young very trendy.

E  What about the other branches — the future branches in Saida and Dbayeh?
We’re full in Saida, all the shops, and in Dbayeh I can’t even open the leasing right now, because I have 100 shops, and the waiting list is 500 long!

E  Is there one that you like the best?
Dbayeh. It’s a more interesting one because it will be bigger, it will be on the highway, it’s very well located, and you have cinemas, entertainment, and we have many more anchor tenants than Sin el Fil or Saida, because they are smaller malls. In Sin el Fil and Saida, you have about 12,000 square meters of gross leasable area. In Dbayeh you have double this.

E  Plus, you get to build the Dbayeh and Saida malls from scratch, unlike Sin el Fil. What’s there in those cities now?
In Dbayeh there is nothing. In Saida there will be another mall facing us that they are building now. We will finish at the same time, and both of us will create synergy for the whole area. From there, you have Saida, Tyre, Jezzine, the mountains around there — now there is nothing. We are going there and taking the risk, we’ll be the first, and that’s what you’re doing, trying to be a leader in all markets.

E  How did you get into this business?
I’m a civil engineer, and I worked a lot in France in real estate development. Then I came back to Lebanon… and then I moved to this company.

E  I assume you are a big fan of malls.
No! It’s by accident. I used to build offices, I used to build apartments, it’s all real estate development. Malls are not hard if you have a structured mind and you have the logic for the whole process. Selling malls is like selling glasses, or popcorn. It’s just a product.

E  I noticed that in one of your sketches for the future malls there seems to be a giant Aquarium, which reminds me of a mall in Dubai. Is that what you’re going for? Do you have ‘Gulfie’ aspirations?
The final product — a virtual aquarium, not a real one — won’t be like that. It’s smaller. At the beginning it was like this but it was extremely costly, so we decreased the cost of it. Dubai is Dubai. When you start to do a project in Dubai, it doesn’t matter if it is profitable, it just has to make an impact.

E  So no plans for an indoor ski slope?
In Saida mall? Ha. No. How we will succeed is with the mixed brand in the mall.
Our vision is to be a leader in Lebanon in commercial development, and try to compete on the regional level. So for now, let’s be humble. But in 10 to 15 years? What you want to do is make Acres into something big, a Lebanese company, with a well known trademark in the region.
Right now we’re moving in the right direction.

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Lebanon

Real estate – The house made of brick

by Executive Staff
written by Executive Staff

The region’s real estate markets have seen better times. Jordan’s property prices continue to plummet. Dubai’s real estate bubble has burst. The rest of the Gulf Cooperation Council hasn’t fared much better. In Lebanon, prospective buyers waited for prices to follow suit; figuring the past year’s decrease in construction cost and the lower demand from Lebanese expatriates would bring prices down. But Lebanon’s real estate has had a very different experience from its regional colleagues since last fall’s crash began.

Real estate prices in Lebanon are not going up — but they’re not going down. Demand from expatriates has slowed, but prices have not taken a plunge mainly due to strong local demand and scarcity of land and properties. Still, some prices have decreased 10 to 20 percent because developers who had the luxury of inflating prices due to high demand are being forced to return to the original, fair market value of properties.

Demand leveling out
Local demand for Lebanese real estate has not decreased, since the Lebanese economy, as a whole, has not been severely affected by the financial crisis. The banking sector is still performing well and making loans available. Companies operating in Lebanon are not shutting down or sacking employees, leaving the local demand for properties intact.
What is triggering a concern is the demand from Lebanese expatriates, who represent the largest portion of the market and dominate the mid-range and high-end segments. There is an ongoing debate about how hard the crisis has hit expatriates, and how that will affect the real estate sector.
“Definitely we are seeing the impact,” adds Hani Haddad, managing director of A&H Construction and Development, of his firm’s performance over the last few months. “The demand was much lower. But it is starting to pick up again,” he says.
A&H specializes in high-end properties, whose clientele is comprised mainly of Lebanese expatriates. Haddad says one of the reasons for the lower demand was that people stopped buying. They assumed prices would go down, as in other countries in the region.
“They waited and prices didn’t go down. So maybe now they are starting to change their mind,” he says.
Some say that demand in Lebanon has not been impacted at all, while others say expatriates have started to return with no money to buy a house, consequently lowering the demand for properties in Lebanon.
Coldwell Banker President Elie Harb says that there is no evidence that demand has gone down.
“It is a normal cycle,” he says. “Every year, we see these months have the lowest activity.”
Harb says expatriates who drive Lebanon’s real estate market are highly educated managers and professionals with high incomes. He says it is doubtful large swaths of these professionals would lose their jobs, and is optimistic the real estate market will recover soon.
Christian Baz of Baz Real Estate disagrees.
“All market segments will be affected,” says Baz. “People are coming back broke. They either bought their house already, or are broke and will live with their parents.”
Those who are still buying are currently enjoying the luxury of making an unhurried choice, at least compared to how the Lebanese market was a year ago. Stable prices mean buyers have more time to compare properties, without having to worry about prices going up the next day, or another buyer aquiring the property.
“Properties are not selling as quickly as they used to,” says Karim Makarem, director at RAMCO. “While not so long ago, if you saw a property, the next day it could be sold. Now it is not sitting, but you might have a few days, a week or two before you make an offer.”
Sandro Saade, co-general manager at Greenstone, says prospective buyers are now “pickier.”
“[The consumer] is asking questions, and making sure that the product that is delivered is of better quality and is reflected in the price being asked,” says Saade.

A fair price?
Many factors play a role in determining Lebanon’s property prices, the most important being the availibility of land, construction materials, profits and demand. When the market was peaking, all these indicators were heading upwards. Land became scarcer and construction material more expensive. People rushed to buy properties for fear of further price increases. Some developers jacked up prices, confident consumers would buy out of necessity.
“People have overpaid… because they were either mislead, or they refused to get advice and they went with their gut feeling,” says Makarem. This created a vicious circle where prices rose and buyers rushed to make purchases, which then caused prices to rise again.
Developers who took advantage of the rush are the ones who are now being forced to rollback inflated prices. The lower cost of construction material and dwindiling demand has left them with no other option.
“Certain developers have reduced their asking prices by up to 20 percent,” Makarem says. “But their asking prices were overpriced to start with.”
He adds that there is a huge risk in doing so, because when the market slows down, buyers will know the price increase was unjustified and it will hurt the developer’s reputation.
Other developers who set their prices according to ‘reasonable’ parameters are not finding it necessary to decrease their prices. They did not use the increase in construction material costs as an excuse to inflate prices. And now they say the decrease in the cost of construction material is not substantial enough to trigger a price decrease.
“The cost of construction has not lowered substantially, as people think,” says Karim Saade, the other co-general manager at Greenstone. Saade says this is one of the reasons why Greenstone and other reputable developers are maintaining their current prices. Haddad from A&H concurs.
“We stick to our prices, we don’t lower them and we don’t increase them,” he says.
Even if conventional wisdom says the cost of construction material has decreased and prices should go down, land remains very expensive. In densely packed Beirut, finding a plot to build on has become more difficult, and developers are now including the high cost of land in their cost structure, making apartments expensive.
“There is no land anymore [in Beirut]. And if there is, they are asking for ridiculous prices,” says Haddad.
Makarem says the city’s spatial limits may drive prices up in the boom times, but generally the limited supply helps contribute to the stability of Beirut’s real estate market.
“As long as that is the case, I don’t see any reason why the prices of end products should collapse,” he says.

Money to give
Most Lebanese buyers rely on financing to purchase property. With a healthy banking sector, Lebanon has not been hit by a lack of liquidity, and buyers can acquire home loans or mortgages provided by banks in partnership with the Public Corporation for Housing.
“Conditions are still the same,” says Antoine Chamoun, general manager of Bank of Beirut Invest. “The flow of people is still the same, and I may say even more than before.”
But the situation has changed for expatriates. The crisis has put a lot of expat’s jobs at risk, and Bank of Beirut, and other banks, are increasing the level of scrutiny on the financial status of applicants, the stability of their jobs and other sources of income.
“We are looking more at the source and the stability of the income. We are also seeing if the employer is affected or not,” says Chamoun.
He says the heightened scrutiny and generally bleak economic conditions outside Lebanon has caused expatriate applications to decrease.
The credit situation for developers is better. Developers in Lebanon, compared to their regional colleagues, are not over-leveraged and they continue to apply for loans. A bank not only provides project financing depending on developer’s financial situation, but also on the specific project. The bank studies market activity in the area, the expected sales and other factors.
“We are receiving a lot of applications from developers for project financing — the number [of applications] has not changed,” says Chamoun.

Developers sitting pretty
Most developers are in a good position in Lebanon due to having sold a majority of their projects. Consequently, they have not been forced to sell at a discount as demand has slowed, which has kept prices stable.
“We started the sales process in September 2008, and have sold so far 35 percent of the project, which is a very good result. So we are quite confident” says Greenstone’s Saade.
Developers have not changed their operating strategies. They did not feel the need to. On the contrary, they are still planning ahead and looking for new projects and future investments. Currently there are 300 new construction projects in Beirut, according to Makarem, totaling some 1.6 million square meters of built up area.
A new trend that is coming to the market is the construction of smaller, cheaper units because the financial crisis might lower the budget of some people looking for more affordable units to rent or buy. Brokers are advising developers to focus on the mid-range market, and several developers are considering the change.
“The true demand is to build a house of 150-160 square meters with three bedrooms, and having the price below $200,000, so that 90 percent of the local market can buy” says Harb from Coldwell Banker.
Haddad says that his firm, A&H, might consider building smaller units, but it is still a dilemma because in the high-end segment the target market is usually families who are used to big spaces. Still, they might consider it for their next project. “Our budget is $1.5 million. Maybe you can go smaller, take it down to $500,000,” adds Haddad.

Awaiting the summer
Real Estate professionals are optimistic about the summer. Most believe that if elections go well, the real estate market in Lebanon will bloom again, since it will represent a safe haven for those who still have money and are willing to invest.
“I think in the summer you might find a lot people looking to buy,” says Makarem. “If ever [people] needed evidence that no matter what happens, the [real estate]sector in Lebanon is extremely secure, they have it.”

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Lebanon

Rest & recreation – Clubs find summer’s groove

by Executive Staff
written by Executive Staff

With the Mediterranean a few feet away, and a table groaning with plates of grilled prawns, it’s hard to picture Oceana beach club as a scene of any duress. Life here among the bronzed and beautiful is good. But in 2006, as owner Nicolas Sawan says, the first Israeli bombs to hit the Dammour area were just a few hundred meters away.

“They hit the bridge where we had the Oceana sign,” he says.
Beyond the human carnage and destruction wrought by the July war, Lebanon’s tourist heavy economy also took a blow. The initial overall economic cost was estimated at $2.8 billion and the year, which had begun with a record flow of tourists, saw an 85 percent drop from the previous August, according to Tourism Ministry statistics. The owners of Lebanon’s beach clubs, who had been preparing for a bumper season, were hit particularly hard. Sawan, for example, claims he invested $200,000 on an advertising and marketing campaign that year.
Although the conflict lasted almost exactly the length of Lebanon’s high tourist season — from mid-July to mid-August — Oceana reopened after the bombs stopped falling, just to prove a point: Lebanon doesn’t give up that easily. But the experience left Sawan and other beach club owners with a little less spring in their step, even as this year the Tourism Ministry is once again recording significant year-on-year increases of visitors, up 53 percent in the first quarter.
Ziad Abdo, Oceana’s general manager, said the club would not be investing nearly as much — perhaps half the original amount — in its marketing campaign as they had in 2006. While Oceana still runs radio advertisements, they are playing it a bit cooler, hoping instead to bring in new clients through other means.

A pool of one’s own
For example, they have carved out creative new transport strategies, including an exclusive deal with the Intercontinental Phoenicia Hotel, which will provide a free shuttle service to and from Oceana for its guests. They’re also planning to offer arrival via sea; visitors can leave from the Marina at Dbayeh and take a boat directly to Oceana. Thanks to these innovations, they’re expecting a 30 percent increase from last year’s 62,000 entries.
Gilbert Khoury, owner of Bamboo Bay beach club in Jiyeh, also had to make some hard choices in the wake of the war.
“Because of the 2006 war we had a huge amount of losses, around half a million dollars,” he says. Once bitten, he is now twice shy: after the war, and against the background of continuing conflict and instability that has plagued Lebanon, he abandoned plans to develop a resort and hotel complex on an adjacent property.
“Because of the problems from 2005 to 2008, we decided not to develop a hotel-resort complex as we’d initially planned. It was too risky to invest this much money,” says Khoury.
Instead, he reinvested almost $500,000 in an upgrade and expansion of Bamboo Bay, in order to reposition the club as “one of the most Class A and A plus” projects on Lebanon’s coast, as he puts it. To that end, he’s enlarged the total area of the club from 12,000 to

19,000 square meters, adding 14 private “terraces,” or bungalows, along the beach, and six terraces with private dip pools. Each terrace has its own changing area, shower and restroom. There’s also a “mega-terrace,” which has a larger dip pool, solarium and private bar, as well as a butler service.
“It’s like a micro-beach resort that you can rent privately for the day,” Khoury says.
On top of this substantial investment in infrastructure, Khoury has made what he considers an even more important investment, in human resources.

Select clientele
“Last year, we had a big crisis in hiring qualified staff, because a lot of people left to work abroad. This year, it’s the opposite. Because of the work crisis in the Middle East, we’ve been able to hire a lot of qualified staff from the Gulf,” Khoury says.
“People are willing to come back to Lebanon and work, and that’s what we’re most excited about. It’s not only a restructuring of the physical aspect, but also a deep managerial restructuring. Our staff is very motivated, very qualified, and it’s going to make a big difference in the quality of service this year,” he adds.
Despite increasing the size of the club by more than 50 percent, Khoury plans to limit the number of clients he lets in to 800, maintaining a high area-to-client ratio that will set Bamboo Bay apart. In a tiny, nosy country like Lebanon, what greater luxury is there than a little extra room to breathe? 
At Lazy B, they’ve also placed a premium on space, capping admission at 500 visitors and, as Karima Hawa, wife of owner Georges Boustani, points out, leaving around a third of their land untouched and unused.
“We left it just the way it was,” she says.
Daisy Boustani, Georges’ mother and the club’s designer, has re-done the bar and replaced the furniture for this year. But she’s not expecting anything out of the ordinary.
“We’re just working for the people who are used to coming here,” she says.

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Banking

The bishops of banking

by Executive Staff
written by Executive Staff

Unlike the alpha banks, Lebanon’s smaller banks in the beta (ranked 11th to 20th) and gamma categories (ranked 21st to 30th) are not wholly concerned about growth. Of course, it is an aspiration for them, but not central to their operational strategy. Instead, the more modest banks of Lebanon focus on customizing their bouquet of financial products to target certain client niches.

Jihad Bassil, general manager of Middle East and Africa Bank (MEAB) — ranked 23rd in total assets — is revamping the bank’s strategy to focus on a particular niche market.

“This niche is what we call small and medium clients,” he said, with deposits between $50,000 to $500,000. “We wouldn’t mind having high level or prime clients, but this will not be our main target. We believe [the small and medium] niche is more stable [and] more reliable… than the big names, because the [latter] are subject to competition.”

However, Tarek Khalife, chairman of CreditBank — 19th in total assets — said smaller banks in the country should adopt a more comprehensive strategy. He said not many of the beta banks have succeeded in adopting a “universal approach” to banking, which is necessary since the size of the Lebanese market cannot cater to a niche market strategy.

“You cannot only do private banking or only retail banking; it’s not large enough. You have to have all services [so you can] cater to the needs of your client, because your client requires cross-selling,” said Khalife. “He’s a corporate [client] but needs a car loan or he’s a small to middle market [individual], but he needs a housing loan… You need retail services, commercial lending capabilities and a wide network; you cannot have half of a solution.”

Confidently, the smaller players in this financial game don’t see much of a difference between themselves and the alpha group. In fact, the only difference, they say, is size.

Size doesn’t matter

“The differences between the various groups of banks — alpha, beta and gamma — is only size. We offer practically the same services and products as the alpha banks and they offer the same services and products that we do,” explained Yasser Mortada, general manager and board member at the Federal Bank of Lebanon (FBL).

It seems that none of the smaller banks have a burning desire to be in the top 10. As a member of the gamma group, MEAB’s Bassil said his main target is to join the beta club. He says that being an alpha bank necessitates a consistent strategy to remain focused on staying on top and nothing else. “One day [you] lose control of what you’re doing, just because you want to be an alpha bank and stay at the top.”

He has no desire to be in the alpha group, as the “criteria for alpha banks is not interesting; total assets, total deposits, etc… To make a return on your investment, this is what adds up for me.”

Khalife added that reaching alpha bank status should be the consequence of a clever action plan and nothing else. “Becoming an alpha bank is a result and not an objective in itself. Being big should be the natural result of being successful, and not the other way around.”

He added that naturally, size was a concern for CreditBank. But, after a certain critical mass, one’s attention should shift towards the customer. “After a certain point, size no longer becomes the main parameter that you focus on. You try to focus on customer service, added value to the client, personalized services, etc.”

Lebanese beta and gamma banks take pride in their personalized approach to banking. Mortada outlined FBL’s strategy of being a “private universal bank.”

“This is a contradiction of terms in a sense… The way we look at it at [FBL] is that a regular customer will receive the same kind of services as a high net worth individual,” he said. “You can serve a coke in a can or a nice glass. But obviously, the person receiving the Coke in a nice glass will feel much more appreciated than someone who just receives the can of Coke. The bottom line is they’re both drinking Coke.”

Too much of a good thing

Right now, the Lebanese banking sector is among only a handful in the world with an excess amount of liquidity. At a time when financial markets around the world are pulling all their resources together to create liquid funds, Lebanon has too much and little idea what to do with it.

With no diversity for potential investments, Lebanese banks — of all sizes — struggle to place their liquidity in worthwhile ventures.

“There is too much liquidity, and this is the danger!” warned Bassil.

Similarly, Mortada saw the liquidity surplus as a hurdle.

“To find a place to invest the liquidity, you need medium and long-term projects,” he said. “To have [these] projects you must have political stability. It’s a circle.”

The general manager of Banque BEMO, Samih Saadeh, agreed with his colleagues.

“We are very liquid, it’s a blessing but it’s a very large liability. Placing that liquidity is difficult.” Pondering what banks should do with this overabundance of cash, Saadeh said, “the government does not need it [and] the economy of Lebanon is not capable of absorbing such a huge amount of liquidity. We need to find venues to invest the liquidity in and assets that give us enough return to at least cover costs.”

Mortada added that “liquidity is buying us time to fix our problems [and] time is endless as long as the liquidity keeps coming in.”

Some bankers were worried that as the ripple effects of the global financial crisis begin to make their way to Lebanon, capital inflows to Lebanese banks would slow this year.

Thankfully, this did not happen. “[Remittances] were expected to decrease, and people were saying that 50,000 unemployed Lebanese would come back,” said Bassil. “But incoming money from outside grew this year.”

By the end of 2008, foreign remittances by expatriates totaled $7.7 billion and proved to be a confirmation of the fact that Lebanese expatriates view the country’s banks as safe havens. And as the sector enters into the fourth quarter of 2009, there is little sense that this has changed.

GDP — not debt — is the problem?

Currently, Lebanon’s outstanding debt is expected to stand at nearly $50 billion by the end of the year, according to official estimates. This has always been a major problem for the banking sector as banks forgo the opportunity to invest liquidity in profitable ventures because their balance sheets are weighed down by treasury bills, Eurobonds and certificates of deposit (CDs).

As of March 2009, commercial banks accounted for 56.4 percent of the total debt, while BDL reportedly held 21 percent of the deficit. With interest rates ranging between 8 and 11 percent (depending on the maturity date of the bonds), it is quite favorable for the government to continue borrowing from the domestic banking sector rather than foreign entities.

The smaller banks seem to agree that the alpha banks are the major providers and beneficiaries of government paper.

“Typically, the alpha banks have been benefitting from supporting the public debt. It’s the first five or six banks that are taking part [in lending to the government], not even the whole group of alpha banks,” said Khalife. “When you find banks that have 60 to 80 percent of their balance sheets in treasury bills and CDs — these are banks that have supported the public debt and the currency. They have grown the most and they have benefitted the most.”

Mortada said the reason the size of the national debt is so astounding is because Lebanon’s GDP is stunted.

“The debt level is not high; it’s the GDP that is low,” said Mortada. “The GDP could easily be doubled or tripled in Lebanon and then the level of debt to be serviced would become reasonable.”

Either way, he said the debt in Lebanon is not a problem. “Debt is only bad for you if you cannot service it. If you can service your debt level, then why should you pay it off? You don’t want to be debt free.”

MEAB’s Bassil wholly disagrees. “You don’t give someone money because they need it, you give someone money if they can pay it back; the Lebanese government cannot pay it back,” he argued. “This is not an explanation. The banks are making money out of the debt! It’s a nuclear bomb that will one day explode and it’s a very big problem,” Bassil added.

Khalife explained that if it weren’t for the alpha banks’ capability to support the Lebanese pound and finance the public debt, no one else could have.

“When the central bank and the alpha banks started this long-term relationship, there was no alternative. You had to support the currency; you had to support public spending. Now, if you have other cornerstones of stability — like political stability — then you can focus on [reducing the public debt].”

The arrangement seems to have benefitted both the alpha and the beta banks to some extent.

“You have to say that it’s a whole equation; the alpha banks played a role in supporting the currency and the public debt, [while] we played a better role in catering to the private sector and this has been the driving force behind our growth, our raison d’être,” added Khalife.

However, Saadeh stressed that the national debt should be the last thing on banks’ agendas.

“If we spent the same time we do talking about the debt on increasing productivity, the GDP of the country would soar. Recently, Lebanon’s GDP increased to $33 billion. It could be $50 billion! Debt is not a problem as long as you generate productivity.”

The real problem

Lebanon’s endless political infighting discernably limits investment opportunities for individuals and banks alike. Mortada said that while the central bank has done a great job, the government needs to play its part.

“Now it’s up to the politicians to provide the second half of stability. If they gave us the stability we needed, then I’m sure that our GDP would grow very quickly and the level of debt would not be as heavy as we think it is,” he said.

But as long as political squabbling creates an atmosphere of uncertainty, the liquid state of Lebanese banks is put at risk.

“[People] will always have their assets in liquid form so in the event of a crisis they can transfer all of their assets outside of Lebanon,” said Mortada. “This isn’t bringing any added value to our GDP.”

Khalife concurred, reiterating the need for political calm.

“If you have political security, plus economic stability, you’re going to get more competition and more FDI [Foreign Direct Investment] and this is something we should be hoping for.”

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Society

Natural, not neutral

by Nathanael Massey
written by Nathanael Massey

Nabil Habayeb

President and CEO,  General Electric Middle East

Nabil Habayeb - President and CEO, General Electric Middle East

The environmental problems in the Middle East are huge, and as of yet we still don’t have a common approach to resolve them. As a technology provider, we at GE are doing everything we can to address these issues, but the key thing is implementation of policies and solutions.

This will require a good understanding of the problem by the leadership, a commitment to resolve the problems, and a partnership with all stakeholders — public, private, non-governmental organizations, governmental and financiers — to act accordingly. The main thing is to make sure that we bring awareness and solutions, and have a debate, and come up with reports that focus on the region’s specific issues, in which the different sectors can take an interest.

Five years ago our chairman started the “Ecomagination” initiative, which takes the products that we have and invests in solutions that are environmentally friendly. These products have to go through several kinds of certification to ensure that we reduce gasses, purify water, have more efficient power generation equipment and produce sustainable energy…so, from a company point of view, we’re doing what we think is our responsibility, not just from a corporate social responsibility perspective — of course we have shareholders who will be looking for their return since we are not an NGO. A company like ours can now develop products that are environmentally safe and at the same time profitable. That is why we dub the initiative “Green is Green.”

Ziad Abichaker

President, Cedar Environmental

Since 1992 our country has been under an emergency plan for solid waste collection and disposal — an emergency plan that lasts 17 years?  Something is amiss here. First, the plan has 50 percent of Lebanon’s waste centralized in one landfill site; it was Bourj Hammoud until 1997 and since then it has been Naameh. Soon, space will no longer be available to keep on this environmentally destructive path in Naameh and an alternative would be in order.

There are two alternatives.  Either we keep extending the current “emergency” plan and keep centralizing waste disposal in a mega landfill or we decide to reverse the road and start doing what most other countries are doing, which is sorting, recycling and composting.  Some would argue that we are doing this now under the current plan, but what they don’t know is that we are barely doing this for 6 percent of our total daily waste load.

Soon, it will be a nearly impossible task to convince another region to accommodate the waste of Beirut and Mount Lebanon in their valleys and open spaces, which makes the alternative of continuing with the current plan practically impossible to pursue.

Every region will have to select a technology that will have the least destructive footprint geographically and environmentally. The problem is it might already be too late. Such an endeavor would require at least a two year planning and execution period.  Are the people in charge of the solid waste file doing any thinking about this eventuality?

Garabed Kazanjian

Oceans campaigner, Greenpeace, Lebanon Branch

Garabed Kazanjian - Oceans campaigner, Greenpeace, Lebanon Branch

It is astounding to see a country like Lebanon, which relies greatly on tourism to rebuild its economy, gradually and consistently obliterating its ecotourism assets. Two-thirds of the Lebanese population reside on the coast, a fact that naturally exerts great pressure on coastal resources. Twenty years on after the end of the civil war, solid waste dumps still exist in the form of coastal mountains, constituting a health hazard to the public and a source of toxic discharge to the marine life in their vicinity. Some sites, such as the Saida dump, continue to grow to this date like a cancerous tumor in the absence of waste treatment plans. Moreover, more than 50 pipes continue to discharge untreated sewage on a daily basis into the sea. Chaotic urban development contributes to the destruction of vital marine habitat, primarily the nursery areas of numerous commercially important fish species.

Fragile as our marine ecosystem is, due in great part to the pollution and destruction it is subjected to daily, not to mention the intensely destructive and unsustainable fishing practices throughout the whole Lebanese coast, it will not have the resilience to combat the effects of global catastrophes, primarily climate change and ocean acidification.

That is precisely why Greenpeace is campaigning for the establishment of fully protected marine reserves covering 40 percent of the Mediterranean. These no take/no dump areas (areas protected from both fishing and pollution) aim at protecting vital habitats, such as spawning grounds and nursery areas of threatened marine species, and aid in the recovery of depleted stocks.

Furthermore, the new Lebanese government should impose stricter regulations on coastal industries in regards to their waste disposal, update and implement fishing regulations, and put into practice the zero waste program.

Rima Habib

Associate professor, Faculty of Health Sciences, American University of Beirut

We know that pollutants are responsible for a number of public health problems in Lebanon and beyond… In Akkar in North Lebanon, for example, we performed studies that found evidence of heavy microbiological contamination in water sources, usually as a result of infrastructural problems. In these areas, outbreaks of diarrhea and other symptoms are common… In some communities as much as 80 percent of household water sources can be contaminated, and close to 30 percent of households report sicknesses as a result of contaminated water. Children, of course, are particularly susceptible. This problem is more endemic to rural areas where there is a lack of proper infrastructure to treat and transport water. Another health risk is air pollution. Lebanon is not a highly industrialized country, so the largest contributors to air pollution are traffic emissions, which are usually concentrated in and around urban centers where there is a lot of traffic – Beirut, Tripoli, etc. Air pollution leads to respiratory ailments and to a lesser extent cardiovascular disease as well. Another problem with air pollution is CO2 emissions, of course. To deal with these dangers, it is necessary to apply environmental and public health standards and involve major branches of government…it would be truly excellent if Lebanon could establish a multi-disciplinary agency that involved all the ministries, something like the Environmental Protection Agency in the United States, that has “teeth” to enforce standards and make real changes to address human health from the preventive angle first, meeting possible threats before they result in illness.

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Financial Indicators

Regional equity markets

by Executive Staff
written by Executive Staff

Beirut SE  (one month)

Current Year High: 1,629.74  Current Year Low: 705.56

The Beirut Stock Exchange (BSE), like the country, is being marinated in election oil and masses of political spices. Global markets add their bits to support the notion of wait and see, which has been valid for such a long time and reported on so often that it almost appears to be part of the BSE’s DNA by now. In monthly figures, the Blom Stock Index (BSI) read 1084.9 points at market close on April 24, representing a gain of 29 points versus the last close in March. Market cap leader Solidere traded sideways in the $15 range throughout April. Banks Audi and BoB announced that they will disburse cash dividends for 2008, reflecting the solid earnings positions of the Lebanese banking sector. 

Amman SE  (one month)

Current Year High: 5,043.72  Current Year Low: 2,550.70

The Amman Stock Exchange (ASE) Index closed at 2,803.33 points on April 26, up 3.51 percent on the month and continuing a steady upward trend that began at the end of February. Aided by gains in the banking sector (6.5 percent up on the month), the ASE index traversed into positive territory for 2009 — first on April 5 and then again on April 19, keeping its nose above water in the subsequent sessions through April 26. Despite the good showing of banking stocks this month, the services and insurance sub-indices are still the outperformers for the year to date. Market cap leader Arab Bank, trading ex-dividend, zig-zagged in the $16.20–$17.65 range throughout the review period. Arab Potash Company, number two by market cap, traded down towards the end of April after announcing 70 percent cash dividend effective Apr 19. The company announced a 22 percent year-on-year increase in its Q1 2009 profits, to $50 million.

Abu Dhabi SM  (one month)

Current Year High: 5,148.49  Current Year Low: 2,136.64

Closing at 2543.41 points on April 26, the Abu Dhabi Securities Exchange had to take second place to its peer in Dubai for monthly increases — but the 2.2 percent gains in April by the ADX and relatively small lag behind the DFM is less something to report on than the fact that the ADX came in sixth out of seven GCC exchanges in our review period. Telecoms and insurance sector indices ended the period in the red. Banking, construction, consumer, and industry all recorded gains but all were outdone by the real estate sector, whose sector index ended the review period 30.3 percent higher. Aldar, RAK Properties, and Sorouh appreciated by 37.2, 28.6, and 22.1 percent, respectively. Whereas energy firm Taqa weakened 3.5 percent, the Dana Gas stock emerged as the period’s strongest performer, increasing 44.9 percent over the period. However, on the year to date, for which the ADX Index barely was positive by April 26, Taqa is still Abu Dhabi’s strongest gainer whereas Aldar and Sorouh still need to regain a lot of ground in order to turn green.  

Dubai FM  (one month)

Current Year High: 5,859.57  Current Year Low: 1,433.14

The Dubai Financial Market (DFM) closed at 1,638.15 points on April 26, a friendly 4.44 percent higher than it stood at the end of March. Stocks in the utilities, real estate, and telecom sectors led the market up. The index was as much as 11.2 percent up intra-month but investors harvested cash gains in the latter part of the month. For an attention grabber, shareholders in Shuaa Capital had to confirm that they wanted to keep the company open after loss figures triggered a clause in the DSM rules. They unsurprisingly did so. Equity augurs are meanwhile haranguing about the likelihood of further equity downturns, adding as latest fodder for worries the swine flu panic which could be a viral contagion negatively affecting global markets in general and trade and vacation hubs in particular. The fact that consumption of pork is not the cause of the disease cannot be a comfort, because a problem related to pork consumption would be the easiest to remedy in the GCC. So concerns loom about what impact the human-spread virus will have on the stocks of airlines, hotels and tourism-related developers.

Kuwait SE  (one month)

Current Year High: 15,654.80            Current Year Low: 6,391.50

The Kuwait Stock Exchange (KSE) reported an index reading of 7,479.30 on April 26, representing a gain of 10.9 percent on the month. The best sectors were real estate and industrial, which outperformed the general index by 6 and 3.5 percentage points, respectively. IFA Kuwait, an investment company, and developer, Munshaat Real Estate Project Co, were the top gainers on the KSE in the review period. The former saw its share price more than double and the latter achieved a price gain of 83.3 percent. The KSE has been able to lift the downtrend that had it under its thumb in the first two months in 2009 but the market is still faced with a lot of uncertainty, partly home-spun. The country is waiting for elections on May 16, but one party has already announced a boycott and it is not at all sure that the elections will restore political decision making powers to what is needed for improving the economy in a sustainable way. Market discipline is also still to be improved, as the KSE underscored by suspending three dozen companies for failure to meet disclosure deadlines.  

Saudi Arabia SE  (one month)

Current Year High: 10,089.52            Current Year Low: 4,130.01

Including a three-day dip of profit booking, the Saudi Stock Exchange’s TASI experienced a 15.7 percent gain over the review period to close at 5,440.30 points on April 26. Energy and utilities were the sole sub-index that stayed in the red; most sectors didn’t stray far from the seasonal formula of optimism. However, insurance did stray into exuberance with a sector index gain of over 39 percent in merely 19 trading days. No wonder that insurance stocks occupied all the top spots in the gainers’ list: Sanad, Arabia, Saudi ACIG, Salama, and SABB Takaful were the leaders with gains ranging from 51 percent (SABB Takaful and Salama) to a phenomenal 142.7 percent for Sanad. Biggest underperformer was Al Ahsa Development Company which reported a $1.68 million loss for the first quarter and whose share price slumped 14.7 percent. The ratio of gainers to losers was very positive as only 11 stocks moved lower in April. SABIC, avidly watched by analysts in this period, reported a 50 percent drop in gross revenues and its first quarterly net loss since 2001 for Q1, 2009, but the stock gained 14.6 percent during the review period.

Muscat SM  (one month)

Current Year High: 12,109.10            Current Year Low: 4,223.63

The Muscat Securities Market (MSM) may have the prettiest acronym of all GCC stock exchanges, but its performance in April was nonetheless a marvel in its own right. Closing at 5,252.47 points on April 26, the MSM advanced 13.5 percent when compared with the last close in March and leapt a big step towards recouping its losses from early in 2009. Industry led the market up as services and banking came along nicely. Al Hassan Engineering and Oman Flour Mills were the top performers in the review period, each gaining more than 80 percent. Gulf Stone Compay and Salalah Mills Co — a food sector co like Oman Flour Mills — inversely were situated at the other extreme of the market and saw their share prices melt down by 92.3 and 88.9 percent, respectively. Market cap heavyweight Omantel was notably weaker, ending the period 18.2 percent down.

Bahrain SE  (one month)

Current Year High: 2,902.68  Current Year Low: 1,572.19

The Bahraini bourse (BSE) went through a bulge of gains in the middle of April but the risk appetite of investors quickly proved subservient to their desire to book profits, and the BSE general index closed at 1,580.22 points on April 26, a shade under one percent down when compared with the start of the month. Banking stocks were the drivers of the upward movement in the middle of the month and outperformed the general index with a six percent gain in the review period. The industrial and insurance sectors were rather inactive in April while the investment sub-index underperformed the market. Esterad Investment was the best gainer on the BSE in the review period – the company, which affirmed 15 percent cash dividend at the end of March, moved up 34.6 percent in a phase of trading ex-dividend. Gulf Finance House, which had slumped to historic lows in January and February, was the BSE’s second-best gainer, adding 32.3 percent. In a merger and acquisition deal, Salam Bank-Bahrain formally submitted an offer for Bahrain Saudi Bank. The merged entity would have eight retail branches in Bahrain.

Doha SM  (one month)

Current Year High: 12,627.32            Current Year Low: 4,230.19

A close at 5,424.23 points on April 26 gave the Doha Securities Market (DSM) a promising gain of 10.9 percent for the period since the start of the month but the DSM is still down 21 percent from the last trading session in 2008. This means the DSM is still the year’s biggest underperformer in regional terms, trailing the Saudi bourse at the top by 35 percentage points and lagging behind the second-worst loser, the Bahrain Stock Exchange, by more than eight percentage points. Services were the DSM’s best gaining sector in April, advancing 16.8 percent and followed by banking, up 10.21 percent. All four sector indices on the DSM were higher in April and all but three stocks ended the month unchanged or higher. The strongest loser was Ahli Bank whose 26.5 percent drop wiped out sudden gains made by the stock during a short period in March. The insurance sector visibly underperformed the general index but insurance companies released surprisingly positive results for the first quarter of 2009. Intermittent profit taking influenced the market during the review period.

Tunis SE  (one month)

Current Year High: 3,418.13  Current Year Low: 2,836.64

The Tunindex closed at 3,321.58 points on Apr 24. This represents a gain of 7.42 percent since the start of April, which constitutes a significant upturn in the market’s ascending trajectory that has persisted for four months and certifies the Tunisian Stock Exchange as a veritable maverick, or young bull, in international comparison for the year-to-date. Share price developments since the beginning of 2009 are in the green for all sectors on the TSE, with the sole exception of the building and construction materials sector which is down a fraction of one percent ytd. Insurer STAR was the best performer in April with a 31.7 percent gain. Adding 21.4 percent, Banque de Tunisie had a notably strong price performance and ended the review period in top position for market capital, passing the Poulina Group whose shares also rose but at a lower rate (6.8 percent). 

Casablanca SE  (one month)

Current Year High: 14,631.53            Current Year Low: 9,405.86

The Casablanca Stock Exchange (CSE) again changed direction, this time back north. After losses in March, the Casa All Shares Index close at 10,967.65 on April 24 represented a gain of 5.44 percent since the start of April. The CSE is still marginally down on the year to date but is the region’s most expensive exchange in terms of price to earnings, ending the review period at a P/E of 17.37x according to Zawya. Silver miner SMI topped the list of gainers with 26.8 percent and is now quite an outlier in terms of P/E with 41.13x. Runner up in the gainers was real estate firm, Groupe Addoha, with 20.5 percent. The weakest performers on the CSE in April were car distributor, Auto Nejma, and agro-industry firm, LGMC, losing 11.3 and 11 percent, respectively. Market cap heavyweight, Maroc Telecom, had a positive month, gaining 5.3 percent.

Egypt CASE (one month)

Current Year High: 11,935.67            Current Year Low: 3,389.31

The Egyptian Exchange (EGX) was an example for the elusive green shoots that the tillers of the global economy have so emphatically been discussing in recent weeks. Gaining 21 percent since the start of April, the EGX benchmark index is now up 10.4 percent on the year to date and seems to have distanced itself from the sentiment of total gloom that permeated the opinions of EGX market watchers in the first two months of 2009. Best price performers were two mid-sized stocks, conglomerate Lakah Group (96.8 percent) and real estate developers EHDR (87.7 percent). Numerous large cap companies could add handsomely to market valuations of their shares, including financial, telecoms and real estate sector companies. The Orascom cousins, OTH and OCI, in the middle field of ascenders this month, gained 16 and 11.1 percent, respectively. A new index tool, the EGX 70, is now in its second month of operation. The index, which tracks the bourse’s second tier of 70 most active stocks (after the volume leaders in the EGX 30) increased slightly over 9 percent in April.

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Consumer Society

A slower tick

by Executive Staff
written by Executive Staff

Watch Industry

Time is money? Yes, but what if money’s gone? As the economic slump affecting the world today has caused consumers to worry about wealth, spending and even their future, spoiling oneself with luxurious timepieces is no longer a priority. And the watch industry has been especially hard hit by the worldwide decrease in demand.

“This crisis is not specific to a region, a client, a brand or an industry. It is everywhere; it is killing everybody,” says Georges Bechara, brand manager of Zenith in the MENA region.

Some regions are more affected than others. America — including North and Latin — is heading the list; then comes Europe, and then Asia. Still, the slump in overall demand has been significant in the first two months of the year, leaving watchmakers and retailers on the lookout for any and all business that might come their ways.

According to the Federation of the Swiss Watch Industry, the export of Swiss watches and movements has dropped 35 percent in units and 22 percent in value in the first two months of the year compared to the same period in 2008. In the Middle East during the same period, the drop in units and value was 36 and 22 percent, respectively. In the USA alone, the drop was 47 and 39 percent.

Slower Growth

“The only thing we can say is yes, there is a global crisis. Our sales are down worldwide definitely…  but the thing is that we view it more as a correction,” says Eric Vergnes, Middle East’s general manager of Tag Heuer.

The double-digit growth that was sweeping the watch industry in the last couple years was mainly fueled by ever-increasing demand and very short supply. Retailers and customers had to sometimes wait for months on long waiting lists for their purchase to be delivered.

“A double-digit growth is not normal economically speaking,” says Jean Tamer, president of Tamer Frères, the official distributor of some luxurious watch brands in Lebanon. Watchmakers are rather secretive about their growth and sales numbers, but currently it seems that some might worry about negative growth if sales continue to fall and the overall economic situation deteriorates   further. All the market players agree that the market has not yet hit bottom, making near-term planning difficult.

“Definitely one of the main issues will be for us to continue to grow the way that we have been growing regardless of the crisis,” says Raynald Aeschlimann, vice-president of Omega.

Aeschlimann adds that buying a watch is not like acquiring any ordinary product, as it “appeals to your sense of lifestyle and aesthetics.” He says there’s still demand for palatial and captivating timepieces. However, the fact that consumers are more cautious about their spending is affecting sales, and thereafter growth of the overall industry.

Smaller portfolio and investment

The watch market does not operate under the basic economic law of supply and demand which states that when demand is less than supply, a price decrease will result — and vice-versa. When demand falls in the watch market, watchmakers deal with it differently. They decrease their production, and thus their portfolios, in order not to overstock. This practice leaves the market at a certain level of equilibrium.

“They (the watchmakers) are all concerned; they want to make sure not to over-produce. Instead of producing 10 complications and 10,000 watches for example, they will make maybe 50 complications and 5,000 watches,” says Zeina Khawaji, general manager of Cadrans in Lebanon, distributors of watch brands like Dior, Piaget, Vacheron Constantin and others.

Watchmakers are currently picking the most successful models, producing fewer quantities, and being cautious with new launches since the product might not answer today’s consumer demand.

“Now we are studying what worked for the last two to three years in terms of sell-out, and we are focusing on these products. We are adding some novelties which complement each collection apart, but mainly trimming the collection to [include] the most important collections and models,” says Bechara from Zenith.

Still, as prestigious watchmakers have their own identities, positions and ranks in the market, none have found it necessary to alter their models, production tactic or any other related strategies. The watchmakers say they are only playing with quantity, and not quality, staying loyal to their unique characteristics and historical image.

Moreover, watchmakers are now being more cautious with new investments. They have not entirely stopped their expansion plans, but they are certainly studying the feasibility of these developments and only investing in what is necessary. For example, although Zenith will soon open two boutiques in Dubai, it seems that some other investment have been halted, Bechara says.

“When you look at 2008, of course [brands] prepared for 2009 with big offers, but they stopped because it is not the right moment, and we did the same,” he says. “We will launch it in due time.”

In addition to the smaller portfolio, watchmakers have to find ways to cut down their costs. But they say they try to avoid laying employees off, because they’ll need the talent when the market starts to pick up again.

“[We are] checking all our costs and trying to reduce [them] by postponing certain investments… unless it is necessary, we are keeping the money for the right moment,” says Paulo Marai, managing director of Versace Watches. “But of course we are very conscious of reducing the number of employees and not really touching positions which are key to the future of the company.”

Who will suffer the most?

As regions are not equally affected, the same applies for brands. Market players say that during good times, some brands increased prices without adding value to their products. “A lot of our competitors were tempted to become luxury brands and they moved upscale,” says Matthias Berschan, president of Hamilton International. “There is now a big gap between the price they are asking for versus the substance of the products, and I think those brands will have huge difficulties.”

Now, consumers are pickier, harder to please, and very selective, and therefore pay more attention to details and to getting value for what they are paying.

“With this crisis, [the customer] is taking into consideration the equity of the brand, the history, the DNA. So he is not going to newly established brands,” says Barkev Ataminan, business manager at Ets. Hagop Atamian.

Tamer echoes Atamian by saying customers want “more for the same.”

Experts say the brands that do not offer value for money, and new brands, are considered weak and might not survive the downturn.

“I think we will also hear of some small brands which will disappear because there is no room,” says Bechara.

In boom times, the high returns in the watch industry enabled many to become watchmakers, but without solid communication or a structural base.

“The mistake of the watch industry is that anybody could really have it very easy to start up. So many have decided to enter the market [and] I think today these companies that do not have solid bases will suffer the most,” says Marai from Versace.

The Middle East

“The Middle East is at the forefront of the evolution of luxury goods,” says Aeschlimann from Omega. As a new and growing market, the region has been an attractive destination for many brands looking for new investments and aiming to position themselves as leading market players.

Luckily, Middle Eastern economies are still better positioned to cope with the current downturn, and the watch market in these countries will follow suit. The demand has decreased, but certainly not as sharply as in other parts of the world.

“The Arabs have very substantial fortunes, and if they lose some money it will be a small percentage of it; it is still a small drop in their fortune,” says Tamer from Tamer Frères.

Even in the region, some countries are more affected than others. Dubai has been the worst hit, since a large amount of demand depends on tourists and the many expatriate workers, who are now fleeing the Emirate after they lost their jobs.

“One way we will [face] this is by focusing on forging relationships with the people from this region and not just tourists,” says Aeschlimann.

Other GCC countries are more stable, since their market mostly depends on local demand. The Levant is still considered by watchmakers to be a good opportunity for growth.

“We are actually growing in Lebanon and Syria, and suffering more in markets which are more dependent on international tourists,” says Vergnes from TAG Heuer.

TAG Heuer is even planning to open a new boutique at the Beirut Central District this fall.

“Lebanon is for us a key market. A big part of growth is coming from the Levant area,” says Vergnes.

Although the Lebanese economy has been less affected by the global downturn, Khawaji says the decreased demand is felt in the country.

“We are affected because most of our clients are people who are investors outside Lebanon. They haven’t stopped spending, but they have decreased their spending,” she says. “There is a kind of panic.”

Barkev Atamian says the decreased demand for luxury watches is expected to be temporary, and will not severely impact the market.

“Countries like Lebanon and Syria have room to grow. These will come back to the 2008 situation much quicker than other countries.” Barkev Atamian says. “We are investing much in Lebanon and Syria by opening boutiques in downtown and boutiques in several cities in Syria.”

The gray market

Manufacturers are concerned about the increasing activity in the gray market. As demand dries up, some authorized dealers might sell off their supply at a huge discount, just to get rid of the stock and ensure they survive.

“I know somebody yesterday who dropped a big bulk of some other brand at 40 percent less than the cost just to get rid of them,” says Bechara from Zenith.

Retailers may have many reasons to do so.

“With the huge currency fluctuations in some countries… in the short term [they] can make such big deals,” says Berschan from Hamilton.

This might severally hurt the reputation of the watchmaker, which will be very hard to reverse.

 “It brings in a big mess. It can jeopardize the whole work in establishing the brands in terms of brand image and distribution image; it can blow a whole long-term strategy because of a very short-term opportunity,” says Berschan.

If such things happen, manufacturers immediately halt their relationships with retailers, who will have a hard time regaining their credibility — if ever.

“If they do something like this with only one of the Swatch group brands, the Swatch group closes them down,” says Berschan.

New incentives

Watchmakers are not only working on their development strategies and portfolio, but they are also trying to pamper their customers, to give them more incentive to buy their products.

“If customers want to spend, they need to be reassured. And the best way to reassure a potential buyer is to assure them a top-notch experience, and it means the best possible environment for a boutique or products that are properly displayed, and the team has fantastic knowledge of the product,” says Vergnes from Tag Heuer.

Brands are also emphasizing the need to keep on improving their products, and adding novelties, in order to keep-up with their customers’ expectations.

“It is about sticking to the roots by continuing to surprise people,” says Aeshclimann from Omega. “If you have the right product, clients will come.”

Marai from Versace agrees.

“We have decided, despite the downturn, not to stop our process of developing new products,” Marai says. “We can come up with some novelties that are interesting if we just stay in our existing lines.”

Future expectations

The watch industry, as with every industry these days, is facing difficulties. And like other sectors, watch companies have to rethink their business strategies, expansion plans and other long-term goals. In the end, when demand returns to its excessive levels and people start adorning themselves with plush watches and bravado pieces again, those who showed their solid base and ability to adapt will be the ones benefiting.

“A crisis like this will clearly show who had a long-term strategy and speaks to the substance of the product, versus the price and who did not, and I think there will be a huge difference between those who will suffer a lot, and those who will still perform well in this difficult environment,” says Berschan from Hamilton.

Tamer seems downbeat regarding the length of the current downturn.

“Surely we entered a crisis that will take over three if not five years to recover,” he says. “We still have not reached half the way, and it has still not reached the bottom.”

As some try to predict the future, others find it impossible to expect what the turnout of the current situation will be. “It is totally impossible to tell. I just hope that we keep on doing well,” says Vergnes.

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North Africa

Private power

by Executive Staff
written by Executive Staff

Tunisia is one of the few countries in North Africa that is not a major energy producer, but a series of new projects is set to recharge the electricity sector.

The plans include a variety of strategies, such as natural gas production facilities, the traditional suppliers of electricity, being supplemented by renewable ones. Although the state’s electricity company maintains strong control over distribution, private companies are increasingly able to participate in the development and production phases.

The Abu Dhabi National Energy Company (TAQA) recently joined the ranks of the Tunisian Electricity and Gas Company’s(STEG) as new private competitors. National production of electricity in 2008 was just under 14 billion kilowatts per hour, of which STEG produced 10.25 billion kilowatts per hour and the local private power generator, Carthage Power Company (CPC), was responsible for most of the rest. With demand for electricity rising at around six percent annually, there is potential for other private sector contributors.

“If foreign investors are allowed to invest, they have a guaranteed sale for the electricity,” said Constantin Haddad, general manager of Carthage Power Company. “Demand is rising impressively in Tunisia, thanks to rapid population growth and the increase in industrial activities.”

In early April, TAQA announced it will allocate part of a $2.5 billion investment in Maghreb energy infrastructure to a combined gas power plant in Bizeerte. The plant will generate between 350 and 500 megawatts. Construction is expected to begin this year under the build-own-operate-transfer model, whereby TAQA will design, finance, construct and maintain the property. Commercial operations will begin in 2012 or 2013, with production sold exclusively to STEG.

The TAQA project is only the most recent of a number of new plants. Work is set to begin on a 400 megawatt combined-cycle plant at Ghannouch, near Gabes, at an estimated cost of around $600 million. The development is due to start operations in 2011. France’s Alstom group will build, operate and maintain the installation for 12 years. Ghannouch will be the third power plant constructed by Alstom for STEG in Tunisia, after the combined-cycle power plants of Sousse and Rades, which went online in 1994 and 2001, respectively.

STEG also has a list of projects it is developing independently, such as an extension to the Fernana plant due to be ready by end-2009, and an extension to the Thyna plant at Sfax, scheduled to be in production by 2010.

Even more ambitious programs are already in the works for the country’s 12th development plan, which will last from 2012 to 2016. According to the head of administrative affairs at STEG, Mohamed Ben Ftima, two combined-cycle plants are to be built at Sousse and Bizeerte, in addition to a plant at El Haouaria, which will deliver power to the Tunisian grid.

A joint company set up between STEG and the Italian grid operator, Terna, will carry out this project. Interconnection with Italy will be via a cable between Cap Bon and Sicily.

Many of these projects are natural gas-based plants but the government is also leading the charge on renewable energy production, especially wind power. Efforts so far have allowed Tunisia to cut its energy bill by 10 per cent annually for the past three years and launch an international tender to sell unused carbon credits — and there is potential for more growth.

Renewable energy

Studies indicate that Tunisia could eventually generate 1,000 megawatts from wind. By end-2010, 120 megawatts of wind energy will come online from the Sidi Daoud site, at a cost of around $80 million. Together with the three new wind plants at Metline and Kchabta in the Bizeerte region, this source will eventually supply up to five percent of the nation’s energy requirements.

Renewable energy projects have become an important target of foreign direct investment, particularly from Spanish firms. Gamesa, the wind turbine manufacturer, is supplying STEG with 91 turbines for Bizeerte. The Spanish Development Aid Fund will finance the project, which is set to become Tunisia’s largest wind-power facility. Spain, it should be noted, is one of the global leaders in wind technology.

Tunisian legislators are also encouraging the use of alternative energy at the most basic level, with legal provisions for companies and individuals to produce electricity from renewable sources for their own consumption. Any excess electricity can be sold to STEG and used in the national grid. With this entrepreneurial approach, it seems likely that the government will be able to meet its goal of a 20 percent reduction in consumption, while also sustaining Tunisia’s steady growth.

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North Africa

Building momentum

by Executive Staff
written by Executive Staff

Morocco’s industrial ambitions received a boost in January 2009 when King Mohammed VI launched the construction of Tanger-Med industrial park. Already the site of a significant port project, the new venture will boost output and increase exports to Europe. With strong trade ties to a diverse group of nations, including free trade agreements (FTAs) with the United States (US) and Europe, Morocco hopes to ride out the current recession by building infrastructure to support renewed trade levels in the future and by relying on consistent revenue streams, such as phosphates and derivatives.

When complete in 2012, Tanger-Med will be among Africa’s largest ports, with a container handling capacity of 8.5 million, twenty-foot equivalent units (TEUs). The port, just 14 kilometers from the Spanish coast, will greatly increase Morocco’s profile as an industrial destination and serve as a logistics center for the whole Mediterranean.

The purchase of 30 square kilometers of public land by the Tangiers Mediterranean Special Agency (TMSA) will bolster the free trade zones that have sprung up near the port facility. A second agreement schedules the development of a 50 square kilometer offshore zone near Tetuan. The zones that were established in 2002 have proved successful. The Tangier Free Zone is home to some 400 businesses and 40,000 jobs, while the Melloussa Free Zone, where the Renault-Nissan alliance plans to develop an automobile industrial complex by 2010, is attracting private investment worth $1.9 billion and generating 36,000 jobs.

France has been a strong supporter of Moroccan industry and is its largest trading partner, accounting for 17.8 percent of trade. In addition to successfully advocating for Morocco to be awarded “advanced status” for European Union trading, France signed several bilateral accords that will provide infrastructure financing.

A new tram system will be constructed in Rabat, financed by a $260 million loan from France. The task of developing and implementing the new light rail network has been assigned to France-based engineering firm Alstom and the French infrastructure group Colas. France has also approved $125 million in grants to study the feasibility of a high-speed rail link between the port of Tangiers and Casablanca.

Foreign investment

While a large portion of Morocco’s foreign direct investment comes from France — much of it invested in infrastructure — North African and Asian countries are playing an increasingly important role in the industrial sector. Industry contributes 25 to 35 percent of gross domestic product (GDP), depending on agricultural performance, and investors have found a number of opportunities, particularly in fertilizer and phosphates production.

Sales of phosphates and derivates reached $6.4 billion in 2008, an increase of more than 50 percent from $2.7 billion in 2007. The segment accounts for 33.4 percent of all exports.

As prices have increased for phosphates and derivatives on the international market, foreign companies have expressed interest in Morocco’s holdings. In May 2008, Moroccan state-owned phosphate company Office Cherifien des Phosphates (OCP) signed a billion dollar deal with Libya Africa Investment Portfolio (LAIP) for the construction of three phosphate derivative plants. One is to be built in Libya, another in the phosphate-rich Jorf Lafsar region of Morocco. The third — a fertilizer plant — will be located in one of the two countries after negotiations are complete.

Just days before the LAIP deal, OCP signed a half billion dollar agreement with Hanoi-based PetroVietnam Fertiliser and Chemical Joint Stock Company to build a diammonium phosphate (DAP) fertilizer plant, expected to open in 2011, with an output of between 660,000 and one million tons. Despite volatile prices, global demand is high and chemicals will continue to be a major revenue earner.

Morocco’s expanding list of investors and trade partners should help foster broader market access for its industrial exports. In addition to the agreement with the EU, Morocco has forged other partnerships, such as the 2004 Agadir Agreement and the 2006 US FTA. The agreements have only recently gone into effect and their benefits will remain elusive until the financial situation stabilizes. While Morocco will feel the effects of the global financial crisis, with GDP expected to grow 5.7 percent in 2009, down from 6.5 percent the previous year, the rate is impressive given that Morocco’s major export markets in Western Europe have been hit hard by the downturn.

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North Africa

An economy less fueled

by Executive Staff
written by Executive Staff

Though the global recession will eat into Algeria’s energy revenues and potentially slow new projects, hydrocarbons will continue to drive the country’s growth this year.

Energy, and natural gas production in particular, dominates the economy, accounting for around 45 percent of gross domestic product and some 95 percent of export revenues. The extent of the industry’s influence on the economy becomes even more pronounced when the role of the state is taken into account, given that most of the funding for state services, infrastructure projects and subsidies comes directly from energy earnings.

The sector is one of the few off limits to the privatization program. Industry and Investment promotion Minister Hamid Temmar told parliament in mid-January the only state enterprises that would not be sold off were the energy sector and the national railway.

Earnings from hydrocarbons in 2009 are expected to drop to less than half their 2008 levels, due in large part to the decline in commodity prices.

Speaking on state radio on February 24, Minister of Energy and Mines Chakib Khelil said if prices remained at their present levels, Algeria would generate around $30 billion from gas and oil sales this year. This is a far cry from the $76 billion earned in 2008, when crude prices hit record levels of $147 per barrel. The reduced income stream means Algeria will have to dip into its fiscal reserves to fund state programs to improve infrastructure, health care, housing and education.

Demand dips for oil exploration

The global slowdown in the activities of international oil companies has also had an impact on some of Algeria’s more recent tenders. An auction for exploration rights in 16 plots held in mid-December generated little interest, with only nine bids received from the 80 firms cleared by the government to take part. After the bids were assessed, just four exploration licenses were granted for the 16 tracts available.

According to Khelil, the poor response to the auction was a result of the global economic downturn. “With conditions in the market, you would expect this kind of result,” he told the international media in early January.

While the minister may not be disappointed by the lack of interest, some analysts are suggesting that other factors could be causing potential investors to hesitate.

According to Susan Mance, an analyst at Edinburgh-based consultants Wood Mackenzie, complicated contractual requirements in Algeria can limit a foreign investor’s profits to less than 10 percent. The situation has lead many international companies to steer clear.

“Concession terms are among the most challenging fiscal regimes for international oil companies,” Mance said regarding doing business in the Algerian energy sector.

But at the same time, Algeria has demonstrated a keen interest in expanding its role in the international energy industry, as it seeks to become a transit route for exports from other countries, in addition to being a supplier itself. In late February, Algeria and Nigeria held talks aimed at finalizing a memorandum of understanding on the proposed Trans-Saharan Gas Pipeline (TSGP) project.

The $12 billion scheme foresees construction of a 4,400 kilometer gas pipeline from Nigeria through Niger to Algeria, where it will link into the Algerian export grid to Europe. According to Mohamed Meziane, the chief executive officer of Algerian energy monopoly Sonatrach, the TSGP could be operational by 2015.

“There is the need to speed up the process and ratify it fast,” Meziane said after a round of talks in the Nigerian capital. “This would give the two countries the opportunity to fully benefit from the investment.”

It is still unclear if Algeria will contribute to the construction cost of the pipeline, or merely be a conduit for Nigerian gas on its way to Europe. Either way, the country will be in a position to turn a profit.

While 2009 may prove a more modest year for the country’s hydrocarbon coffers, the country has identified gas reserves of around 4.4 trillion cubic meters and vast areas of the country are yet to be surveyed for further reserves.

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